The Effect of IFRS on Investment Decisions: European Evidence during Crisis and Non Crisis Economic Conditions

68 Pages Posted: 20 Aug 2017

See all articles by Leonidas C. Doukakis

Leonidas C. Doukakis

University of Lausanne, HEC

Konstantinos Kapellas

Athens University of Economics and Business

Georgia Siougle

Athens University of Economics and Business - Department of Accounting and Finance

Date Written: February 1, 2017

Abstract

This study investigates the effect of a change in financial reporting regulation, the adoption of International Financial Reporting Standards (IFRS), on investment decisions in Europe. It further investigates whether capital investment decisions were influenced by the adverse macroeconomic conditions that took place during the crisis period in the Eurozone in years 2008-2010. Moreover, we control for the fact that the impact of the IFRS adoption may differ depending on a) the timing of the adoption i.e. voluntary versus mandatory adopters and b) the legal enforcement and corruption levels. We provide evidence that financial reporting practices of mandatory versus voluntary adopters cause significant differences in (a) the cost of equity capital, (b) the level of capital investments and (c) the return on invested capital. Our evidence suggest that mandatory adopters improved the level of capital investments and the return on invested capital in the post IFRS period and that the cost of equity capital was reduced. These evidence are more pronounced under the strong legal enforcement environment. For the group of voluntary adopters, we verify also a significant reduction in the cost of equity capital in the post IFRS adoption period. Regarding their investment practices, we document higher level of capital investment relative to mandatory adopters in both the pre and post IFRS period and even after controlling for the legal enforcement environment. We provide evidence that during the crisis period the cost of equity capital was increased for both groups. Nevertheless, our results suggest that both groups keep their investment policy unchanged by not reducing the level of capital investments.

Keywords: Capital Investments, Cost of Equity Capital, IFRS, Voluntary versus Mandatory Adopters, Economic Crisis

JEL Classification: G15, G30, M41

Suggested Citation

Doukakis, Leonidas C. and Kapellas, Konstantinos and Siougle, Georgia, The Effect of IFRS on Investment Decisions: European Evidence during Crisis and Non Crisis Economic Conditions (February 1, 2017). Available at SSRN: https://ssrn.com/abstract=3020094 or http://dx.doi.org/10.2139/ssrn.3020094

Leonidas C. Doukakis (Contact Author)

University of Lausanne, HEC ( email )

Unil Chamberonne, Batiment Anthropole
Lausanne, 1015
Switzerland

Konstantinos Kapellas

Athens University of Economics and Business ( email )

76 Patission Street
Athens, 104 34
Greece

Georgia Siougle

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

Register to save articles to
your library

Register

Paper statistics

Downloads
81
Abstract Views
860
rank
299,279
PlumX Metrics